| Companies reported only modest increases in audit fees and total hours worked in 2011 as compared with the previous year, according to the most recent report from Financial Executives International (FEI). Public companies saw an average five percent increase in fees, while private companies recorded a seven percent rise. Overall, respondents continued to rate their auditor relationships favorably.
The Audit Fee Survey, which is conducted annually by Financial Executives Research Foundation (FERF), the research affiliate of FEI, polled over 270 executives, representing U.S. publicly held companies (of which 86% were accelerated filers with total market capitalizations of more than $75 million), privately held companies, non-profit organizations and foreign companies, to examine the total fees companies paid to external auditors in 2011, and their overall satisfaction with their audit firms. The survey originated 10 years ago to track compliance costs relating to Section 404 of the Sarbanes-Oxley Act, which at the time was the most sweeping financial regulation since the Securities Act of 1934.
In response to their external audit fees, publicly held companies reported paying on average $3.9 million in total audit fees for fiscal year 2011, which represented an increase of five percent from the audit fees that these same respondents paid for their prior fiscal year audit. Overall, executives cited internal audit staff work, and increased work by other finance staff as primary reasons for the difference in fees. The survey also found that 82 percent of public companies reported that they used one of the “Big Four” accounting firms as their primary auditor, with Deloitte mentioned most often.
Furthermore, private company respondents reported an average of $231,200 in 2011, a seven percent increase from the year prior. For companies with annual sales ranging $1 to $4.9 billion, the average audit fees paid were $779,500, an increase of three percent more than audit fees from 2010. Private companies cited increased internal audit staff work and inflation as the primary reasons for their changes in fees. Only one-third of the respondents from private companies (33%), reported that they used one of the Big Four accounting firms as their primary auditor, with PricewaterhouseCoopers mentioned most often.
Financial executives also commented on their relationship with their external auditors. Both public and private companies rated their auditors “neutral-to-good” across eight different criteria. Once again, auditor tenure appeared somewhat proportional to the size of the company by annual revenues. The weighted average number of years based on all public company respondents was 20 years, while auditor relationships with private companies averaged less than half of that at eight years.
For the second year, companies were also asked about their preparations for a formal risk management process. Among public companies, almost three-fourths (73%) of respondents from large accelerated filing companies said that their company did have a risk management process in place and that it had been rolled out to the entire company; however, less than half (40%) of the non-accelerated filers responded this way.
Additionally, over half (55%) of the accelerated filers said that their company had a risk management process that was only used by the company headquarters. Of those companies that do have a risk management process in place, a clear majority of each responding group indicated that it resides with management, rather than with internal audit or the audit committee of the board of directors. In contrast, the majority of respondents from private companies (63%) did not have a risk management process in place, a slight increase from last year.
“As we approach a milestone anniversary of The Sarbanes-Oxley Act, public and private companies are continuing to demonstrate overall control with the external audit process,” said FEI President and CEO Marie Hollein. “Given the current state of businesses, risk management will remain an area of focus for finance professionals. Furthermore, a major point of differentiation among companies continues to be the contrast between companies with centralized operations and decentralized operations, as audit fees for those with centralized operations continue to be significantly lower. Companies will certainly continue to look for cost efficiencies, and it will be interesting to observe the changes to their process in the next year.”
Scott Cutler, Executive Vice President and Head of Global Listings at NYSE Euronext, the survey’s sponsor, added “NYSE Euronext is happy to once again sponsor this year’s survey. We congratulate FEI and FERF for all their good work with this year’s Audit Fee Survey and results. We are pleased to note that audit fees continue to remain relatively stable and that companies continue to address and progress through the various compliance requirements that come with being a public company. We do, however, continue to recognize that there needs to be an appropriate balance between costs incurred and benefits realized. We also are pleased to see that the auditor/company relationship remains a strong one and that the clear majority of the respondents value this relationship and are not looking to mandatorily rotate that relationship, a position that we support. We also are encouraged by the ongoing diligence of the companies and their boards in assessing risk”.
Other key findings from the survey include:
(1) When asked about their support of a mandatory auditor rotation, an overwhelming majority of both public company respondents (95%) and private company respondents (85%) do not support it.
(2) Public companies responding to the survey were, on average, larger than private companies in terms of annual sales revenues.
(3) The average audit fees of companies with centralized operations were significantly less than those with decentralized operations, for both public and privately-held companies.
(4) A large majority of the large accelerated filers (81%) list their shares on NYSE Euronext, while most of the smaller publicly-held companies list their shares on the NASDAQ.